Thanks to Seth Handy

For sending us a really good article on crunching the true numbers on natural gas versus renewables.  We re-produced only part of the article; the balance can be found on their site (rmi.org).

We are going to follow this up with an interesting piece on an effort to build out a natural gas filling station network across the US for cars and trucks.  Ironically, as we do that and move away from imported oil (a very good thing) we compete, in transportation, head-on with EV's...a clean, renewable source.  Should we?  We'd love to hear from you.

Also, we are on the road this week and found a great Hampton Inn, Sarasota, FL, out by the airport, with solar panels, full recycling, flush-less toilets and car-charging stations.  And a great little hotel to boot.  Kudos; we love it   Look them up and stay here when you are down this way.

Hot Air About Cheap Natural Gas

Amory B. Lovins & Jon Creyts

RMI Co-founder and Chief Scientist / Program Director

 

Would you build a buy-and-hold financial portfolio from only junk bonds and no Treasuries by considering only price, not also risk? Not for long. Yet those who say cheap natural gas is killing alternatives—solar, wind, nuclear—make the same error. In truth, they’re doing the math wrong: the gas isn’t really that cheap.

“Cheap gas” reflects only the bare spot price of the commodity without adding the value of its price
volatility. Yet such competitors as efficiency and renewables have no fuel and hence no fuel-price volatility: once built, they’re as financially riskless as Treasuries. Of course, much gas is sold not at spot but on long-term contract, especially to its biggest user—electricity generators. But for other players, it’s vital not to become the patsy in the poker game: basic financial economics says asset comparisons must value and equalize risk.

One way is to compare fuel-free competing technologies with constant-price gas. A broker will take the price-volatility risk for a fee based on the market’s risk valuation, discoverable from the “straddle”—the sum of the prices of simultaneously sold put and call options. A year ago, when the cheap-gas mania was taking hold, gas-price volatility five years out was worth more than recent spot gas prices. Even today, with lower price and volatility (whose value automatically falls with price), gas’s price volatility alone, over a time horizon appropriate for comparison with durable assets, is worth roughly what gas now sells for. Omitting price volatility thus understates gas’s true cost (excluding its fixed delivery costs) by about twofold—a very material error.

A leading promoter of shale-gas fracking, asked about this at a recent financial conference, replied, “Trust me!” Gas, he claimed, would remain very cheap for a very long time. So how much gas would he contract to sell for a constant $2–3 per thousand cubic feet for 20–30 years, backed by solid assets unlinked to hydrocarbon prices? Probably none.

Actually, you can buy gas today for delivery at least a decade hence. Sure enough, it costs 2–3 times more, or about $6. So why doesn’t a fracking promoter lock in huge profits by shorting gas futures? Because shale gas (unless sweetened by valuable liquid byproducts) has lately sold at below its cash production cost. The reasons include frenetic drilling (driven by use-it-or-lose-it leases and the need to book big reserves to raise cash), pricey oil spurring plays in oily shales, and filled storage due to a mild winter. Those low 2012 natural gas prices will probably prove as transient as the even lower real prices of 1995–2000.

The gas industry’s inherent short-term price volatility is due to weather, storage, trade, and other factors. The April 2012 low gas price rose 31% by the end of May and doubled for delivery two years hence. Uncertainties increase further out because economies are complex and unpredictable. The fracking revolution didn’t repeal basic economics: to get $6–8 gas, just assume $3–4 gas, use it accordingly, and watch supply and demand reequilibrate at higher prices...